Supply and Demand

The Demand Curve

2

The demand curve

Lecture 3 outline (note, this is Chapter 4 in

the text).
The
Th

Graphically shows how much of a good consumers are

willing to buy (holding their incomes, preferences, and other
things constant) at different prices.

The demand curve shows the relationship between

price and quantity demanded, holding other things
constant.

demand
d
d curve
supply curve
Factors causing shifts of the demand curve and
shifts of the supply curve.
Market equilibrium
Demand and supply shifts and equilibrium prices

The Law of Demand

Shifts in Demand

The

Economists frequently use the Latinism ceteris paribus, which

means other things equal.

The other things equal assumption is extremely

important.

If other things are not held constant, demand will shift.

Factors causing demand to shift include

Ch
Changes
in the
h prices off related
l d goods.
d

Changes in income

Substitutes and complements

Normal goods and inferior goods

Changes in tastes, and

Changes in expectations.

Higher price for a good, other things equal, leads people

to demand a smaller quantity of the good.
3

A Pitfall: Confusing Movements Along vs.

Shifts in Demand

Shifts in Demand: Examples

5

Price

Income
falls, or
prices
or tastes
change

Causes: income rises (if the

good is a normal good); price
of a complement goes down
(substitute goes up); people
like the good more; or they
expect it to become more
valuable

Price changes cause movements along a demand

curve.
Other factors will cause shifts in demand.
Increase in the price of peanuts will cause a reduction (shift)
in the demand for jelly.
Discovery that peanut M&Ms increase lifespan would reduce
demand for Butterfingers.
Increases in income will (generally) reduce demand for Kraft
dinners (or Ramen noodles).
Increases in the expected value of a college degree would
increase demand for college.

D
Quantity

Movements Along vs. Shifts in the Demand

Curve
7

The Supply Curve

8

A shift of the demand curve

The supply curve shows the amount of good or

service suppliers will be willing and able to sell at a
particular time at a particular price, ceteris parabus.

is not the same

thing as a
movement along
the D curve

The supply curve is upward sloping because, all else

being equal, as the price of a good rises, people are
willing to sell a greater quantity of the good.

D
Q

What Causes Shifts in the Supply Curve?

The Supply Curve

9

10

Changes in input prices.

An input is a good that is used to produce another good.

Changes in technology.

11

12

A competitive market is in equilibrium when price has

moved to a level at which quantity demand equals
quantity supplied of that good.

S
S

Changing diet fads will reduce the supply of products like low
carbohydrate bread and pasta.

Market Equilibrium

A shift of the supply curve

is not the same thing as

a movement along the
supply curve.

Better engineering can increase the supply of computers. More

computers will be supplied at a given price.

Changes in expectations.

Movement Along and Shifts in the

Supply Curve

An increase in the price of steel will lower the supply of automobiles.

Competitive markets have many buyers and sellers and

none is large enough to individually affect the price.

Why do markets reach an equilibrium?

If prices are too high, there is excess supply (a surplus) and
people will lower prices.
If prices are too low, there is excess demand (a shortage)
and people will raise prices.

An Example

Market Equilibrium
13

14

Demand is Q = 64-5P
Supply is P=4+2Q
Solve for the equilibrium,
graph your result.
D: Q=64-5P
S:Q=-2+.5P, set D=S
Implies 64-5P=-2+.5P
5.5P=66, implies P=12
and Q=4

S
P
(5,14)
(0,12.8)
D

Equilibrium
(4,12)

(0,4)
(64,0)
Q

15

Prices Above Equilibrium Result in a

Surplus

Price Below Its Equilibrium Level Creates a

Shortage
16

S
P

Surplus

Equilibrium

D
Quantity demanded

Quantity supplied
Q

17

Analyze the (short run) Market for Diet Dr. Pepper if

the Surgeon General Says It Promotes Weight Loss
Price An increase in demand

18

Price

leads to a movement
along the supply curve to a
hi h equilibrium
higher
ilib i
price
i andd
quantity

P
P

Analyze the Orange Market if Florida

has a Wisconsin Winter
A decrease in supply

S
S

P
P

D
Q

leads
l d to a
movement along
the demand curve
to a higher
equilibrium price
and lower
quantity

Quantity

Quantity

Simultaneous Shifts of the Demand and Supply

Curves: Two Examples

Bad weather in Florida, and

fruit causes hair loss
S

D
Q falls, P ? (up here)

D
Q of oranges

Manufacturing
efficiencies and viruses
S

S
S

Q of computers

Q ? (up here), P19falls